Elmus Wicker, Professor at the Indiana University and author of Banking Panics of the Great Depression identifies 3 major panics and 2 incipient panics of the National Banking Act era. The three major panics, defined by the presence of a general loss of depositor confidence in at least one region and the suspension of cash payments, are the Panic of 1873, Panic of 1893, and Panic of 1907. The two incipient panics, in which the New York Clearing House Association (NYCH) authorized loan certificates but did not announce suspension of cash payments, were the incipient Panic of 1884 and the "Monetary Stringency of 1890."

Under the National Banking Act the United States had no central bank. Banks were divided into national banks, state banks, savings banks and private banks, the latter of which consisted mainly of brokerage houses. Further, some banks in selected reserve cities were chartered as reserve banks, where other banks were allowed to keep a portion of their required reserves. The reserve banks themselves had a reserve requirement of 25 percent. New York City and later Chicago and St. Louis were designated as central reserve cities, where the regional reserve banks kept a portion of their reserves in turn, and which had a statutory requirement of 25 percent reserves. All other banks were designated country banks and had less stringent requirements. Country banks had incentive to keep their money in a select subgroup of New York City banks that chose to pay a high interest rate on deposits. Keeping money in New York City banks was more lucrative in general due to the prestige of the city and the greater opportunities for investment there.

During the spring crop moving season and even more-so the autumn harvest season the country banks had a greater demand for cash, and they withdrew money from the reserve banks, which in turn withdrew from the New York City central reserve banks. Due to the inelastic money supply as a result of both the gold standard and the lack of a central bank to perform open market operations, as well as the strict statutory reserve requirement, these seasonal adjustments always resulted in a liquidity shortage in New York City peaking around May and especially September each year. This is measured by historical records of interest rates on call money, effectively commercial paper or brokers' loans. One view is that this seasonal cash stringency contributed to the financial panics of the gilded age.

The New York Clearing House (NYCH) was a private association of New York City commercial banks that was formed to clear checks between members but in 1860, 1861, and again in 1873, 1884, 1890, 1893, and 1907 responded with varying degrees of effectiveness to check financial panic. The primary tools at its disposal were several fold:

(1) The issue of clearing house certificates, or loan certificates, were extra-legal money backed by the will of the clearing house members themselves. Because they were collectively backed by all the members of the clearing house they were considered safe and acted like newly minted money, but they carried with them an interest rate of 7 percent to insure that they were only used during panics. Banks could use these loan certificates to settle debts with other banks if they were short of reserves.

(2) The pooling of reserves of all clearing house members, which was only used once, under the leadership of clearing house committee head George S. Coe, who is praised by Wicker for his strong leadership and understanding of the responsibility of the clearing house to act as a central reserve. This equalized all reserves to strengthen the weaker members during a crisis.

(3) The suspension of payments. The clearing house could order a suspension of cash payment. This could take various forms. Banks could pay a fraction on the dollar for demand deposits, for example. The clearing house usually suspended cash payment when the reserve ratios of its members collectively fell below the legal limit. Walter Bagehot was heavily critical of this type of approach.

The Panic of 1873 onset on September 18 with the failure of Jay Cooke and Company, the NYCH issued loan certificates on September 20, ordered suspension of cash payments on September 24, and resumed cash payment on November 1. The panic originated in the New York money market and spread down the eastern seaboard to Philadelphia, Washington D.C., and Virginia, and finally to the Midwest. However the total number of bank suspensions that Wicker could confirm from newspaper reports and Bradstreet's, a financial journal, was relatively small at only 101, including 37 in New York, with the vast majority being brokerage houses. Although we have no data on GNP, macroeconomic estimates from Christina Romer (1989) and Balke-Gordon (1989) disagree on GNP effects, with Romer finding that there was not a decline in 1873 or 1874. There is even less data on unemployment. Although the NYCH suspended cash payment, it continued to pay out freely to the interior country banks. The NYCH's reserves were severely depleted from $53 million at the onset of the crisis to about $6 million at the trough. An even larger crisis was averted by suspension of payments and the pooling of the NYCH's reserves.

The Panic of 1884 was onset by the failure of Grant and Ward on May 6, a financial house joining former President Ulysses Grant with a speculator, and runs on banks associated with this failure, as well as a couple of other incidents of malfeasance from within banks. The stock market crashed, and NYCH loan certificates were issued in May 14. The NYCH promptly stepped in and bailed out key banks, ending the crisis. There were 42 bank failures in this incident, 15 in New York City and 27 in the interior; the majority were brokerage houses.

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A New Chapter"I feel like Paulette Revere — the recession is coming, the recession is coming!” - Hillary Clinton, April 3, 2008

The "Monetary Stringency of 1890" was onset by the failure of Decker, Howell, and Co., a respected brokerage firm, on November 10, coinciding with a stock market crash that month. NYCH loan certificates were issued the following day. There had been monetary stringency all year because of British selling of American securities to make up for bad loans made to Argentina. There were rumors of the failure of British merchant bank Baring Brothers. The NYCH intervened and bailed out some banks. There were a total of 18 bank failures, of which 10 were in New York City and almost all were brokerage houses.

The Panic of 1893 was by far the largest in terms of total number of bank suspensions, at 503. Unlike all the other panics of this era, and like the banking panics of the Great Depression, it originated in the interior rather than the New York money market. The NYCH, like the Federal Reserve during the Great Depression, was not as responsive to these crises than it would have been to a crisis in New York. The business cycle peaked in January 1893 and the Philadelphia and Reading Railroad failed on February 26. On April 21, the US Treasury fell below $100 million in gold reserves in account of the Sherman Silver Purchase Act, and when the Treasury Secretary said that the Treasury might have to redeem notes in silver, there was a crash in the stock market, which was reversed only when he was contradicted by President Cleveland, who had campaigned on repealing the Silver Purchase Act. However, the real catalyst for the crisis was a stock market crash on May 3, which caused capitulated in the stock price of the National Cordage Company, and its failure the next day. The banking panic began to build steadily in May and accelerated into July.

There were 57 bank failures in May, 126 in June, 219 in July, and 101 in August. They were evenly distributed between national, state, and private banks. 76 percent of all of the bank failures were in the Western, Northwestern or Pacific regions, with a further 11 percent in the South. The New England and Mid-Atlanic regions were largely spared of panics. Partially as a result, NYCH loan certificates were not issued until June 15, and suspension of payments was not declared until August 3. Resumption of cash payment was September 2. In July, panics swept through Chicago, Kansas City, Missouri, Kansas City, Kansas, Denver, Louisville, Milwaukee, Portland, and 25 banks failed in California. Depositors did not distinguish between solvent and insolvent banks; indeed they had no way of knowing. About 1/4 of the banks that suspended re-opened with a year. Many banks were originally hit in May or June and invoked a rule requiring 30 day notice of withdrawal, only to fail after depositors returned for their money after 30 days. The effect of suspension of cash payment where implemented was a currency premium and a difficulty in meeting economic transactions, including difficulty in meeting payroll. However, it did encourage gold importation. The reserves of the NYCH banks fell from $135 million to $77 million, but suspension of payment would not have been necessary had reserves been pooled; however there was no will to do so within the NYCH. Romer and Balke & Gordon find only a mild recession in 1893-94; however unemployment estimates range from 12 to 18 percent at the peak of the crisis.

The Panic of 1907 was the most severe by liabilities of failed banks. The Panic began on October 16 with the failure of Otto Heinze Co. and their broker, and runs on banks associated with the Heinze interests. This stage was contained by the NYCH bailing out its members. However on October 22 the Knickerbocker Trust Company which was not a NYCH member due to being a trust company, failed and this set off the real crisis. Clearing house loan certificates were issued on October 26 and cash payments were suspended the same day; they were resumed on January 1. The NYCH would not have needed to suspend payments had reserves been pooled, but again there was no will to do so. It did not provide leadership. It did not take responsibility for the trusts, and there was no association for the trusts. JP Morgan returned to the city and took leadership, arranging a series of money pools to save the banks and brokerages, and New York City itself. The Treasury also deposited about $25 million in NYCH banks and regional banks, enabling them to continue to make cash payments.

A total of 73 banks failed, including 33 state banks, 11 national banks, and 15 trusts. 13 were in New York City and 60 were in the interior. Both Romer and Balke-Gordon find a significant GNP recession in 1907-08, larger than 1893-94, but unemployment peaked at only 6-8 percent. Total deposits of trusts declined from $812 million to $544 million between August 22 and December 19.

Wicker relies on O.M.W. Sprague's report for the monetary commission, History of Crises Under the National Banking System, as well as Bradstreet's and other news and journal records, records from the Office of the Comptroller of the Currency and other government sources, as well as previous academic studies. His contribution focuses on the banking situation in the interior, which has previously been understudied due to lack of data. However, all of his estimates of bank suspensions are pieced together from various sources and tentative at best.

Wicker argues that the NYCH successfully prevented crises in 1884 and 1890 and also could have prevented crises in 1893 and 1907 had it acted more decisively, notably by early pooling of reserves instead of cash payments and taking more responsibility for interior banks and trusts. He highly praises George Coe, who argued forcefully for the NYCH's reserve role in a report in 1873. However, reserve pooling was never again used after 1873, even though at times a large majority of NYCH members were for it. One reason for this was that some NYCH members objected that it rewarded risk taking banks and banks that paid higher interest to attract deposits from country banks, over more cautious banks. Wicker acknowledges that a private voluntary association with no structural leadership may be inadequate to the task of acting as a central reserve, although he maintains that had the NYCH acted in unison, it might have been even more powerful than some European central banks.

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A New Chapter"I feel like Paulette Revere — the recession is coming, the recession is coming!” - Hillary Clinton, April 3, 2008

........However, reserve pooling was never again used after 1873, even though at times a large majority of NYCH members were for it. One reason for this was that some NYCH members objected that it rewarded risk taking banks and banks that paid higher interest to attract deposits from country banks, over more cautious banks.......

Thats strikingly relevant to the recent economic crisis. Its the same reason many people opposed the 2008 Bailout, that we were rewarding risk takers and removing the possibility of failure that used to keep them in check.